Bitcoin

Lately there has been alot of talk of Bitcoin in the news (driven by the shutdown of the drug-selling site Silk Road, and now the shuttering of Mt. Gox).  But for most, Bitcoin – and cryptocurrency – is really just some cyber mumbo-jumbo.  The ultimate question is – how does this actually matter?

First, we must understand what Bitcoin is.  Bitcoin is a type of cryptocurrency.  I’ll spare the nitty gritty of how it works, but the short explanation is that each piece of currency is ultimately a unique set of letters and numbers.  Similar to the serial number on your paper money.  This unique number is validated by a huge amount of people who (in exchange for a small amount of bitcoins) run servers to check and validate the ownership and transfer.

Head spinning?  Try this example.  Lets say we get 10 people in a room and make up our own money system.  The computer spits out a number and tells me that I have $1 and the ID is 1A.  I tell everyone: “I have 1A.”  Everyone nods in agreement.  Later, if I want to buy something from someone else, I simply shout “I’m giving 1A to Bob.”  Everyone nods.  Because multiple people listen, as long as a majority agree that I have 1A (and soon Bob will) the transfer can go through.  So, the system works on redundancy and agreement.

There is no agency that controls the flow of cryptocurrency, and it’s supply grows at a set rate, which controls the supply from getting out of control.

But do you have to care?

No – not yet at least.  For now, the best way to view bitcoin and any other cryptocurrency is as a risky investment.  Lots of money can be made, and if you want to set up your machine to be a validation node, you can even earn a few bitcoins here and there, but there are major risks involved, and like all risky investments, you should really understand it before jumping in.

The future is unclear though.  Since cryptocurrency has no government backing, it is protected from government defaults and fluctuations.  At some point, it is reasonable to consider that a cryptocurrency will be on the same standing as the US dollar, the Euro, the British Pound, etc, but it is unlikely that it will replace those currencies – at least not until there is a global government (should such a thing ever happen).

 

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2 Responses to Bitcoin

  1. Fascinating topic, thanks for the general info. It feels to me as if today’s new money literally feels disenfranchised and disillusioned with the current monetary system. We can expect more e-banking and currency to overtake elitist, discriminatory brick-and-mortar financial institutions and that’s a positive thing!

    • I believe that is exactly the point. Things are young, and as they mature I believe they will find legitimacy.

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